Fit for purpose

The MT Højgaard case in the Supreme Court illustrates how lawyers, adjudicators, arbitrators and judges are now likely to mediate competing contract terms

My builder added: “How can the builder be liable when he has followed the employer’s design specification and that design itself leads to a performance failure?” Readers’ own answer to this question are likely to correlate with whether they are the design and build contractor or the employer.

The court decided it is the design and build contractor who bears the risk – the busy or unwilling reader can stop here. The MT Højgaard case illustrates how lawyers, adjudicators, arbitrators and judges are now likely to mediate ostensibly competing terms in contracts.

E.on engaged MT Højgaard to design, fabricate and install foundations for two offshore wind farms. The foundations failed shortly after completion. The issue to be determined was whether MT Højgaard was liable for this failure.The contract required MT Højgaard to follow certain detailed design codes and it also included a fitness for purpose obligation.

Mt Højgaard argued it was not in breach of the design obligations and the fitness for purpose clause should not be given effect because it was inconsistent with a number of other clauses

MT Højgaard argued it was not in breach of the design obligations and the fitness for purpose clause should not be given effect because it was inconsistent with a number of other clauses. The case provides an index into how to look at fitness for purpose obligations when a contractor has followed all other relevant contractual obligations but the product is not actually fit for purpose.

The Supreme Court decided that MT Højgaard was liable for the costs associated with the failure of the foundations on the basis that:

The reconciliation of conflicting clauses is to be decided by reference to ordinary principles of contractual interpretation

A contractor who bids on the basis of a defective specification provided by the employer only has itself to blame if it does not check such deign procedures and they are defective

Where a design and build contract contains terms which require an item which is, firstly, to be produced in accordance with a prescribed design, and which, secondly, when provided, is to comply with prescribed criteria, and literal conformity with the prescribed design will inevitably result in the product falling short of one or more of the prescribed criteria, it does not follow that the two terms are mutually inconsistent or commercially eccentric

Instead, the proper analysis is likely to be that in most contracts the contractor has an obligation to improve on any aspects of the employer’s prescribed design which would otherwise lead to the product falling short on performance, and in other contracts, the correct view could be that the requirements of the prescribed criteria only apply to aspects of the design which are not prescribed

That the English Courts “are generally inclined to give full effect to the requirement that the item as produced complies with the prescribed criteria, on the basis that, even if the customer or employer has specified or approved the design, it is the contractor who can be expected to take the risk if he agreed to work to a design which would render the item incapable of meeting the criteria to which he has agreed” (Lord Neuberger in paragraph 44 of the judgment).

The court has shown that decision makers ought to seek to give effect to words and terms in contracts rather than ignore terms that may appear inconsistent

What are the implications for practitioners in the construction industry? They will already be aware of the higher risk on design and build contractors but one can now see such contractors seeking to avoid “fit for purpose” obligations. This is ultimately a commercial decision but one can see:

Contractors seeking to include express provisions to state that the fitness for purpose obligations are not applicable in circumstances where other specific requirements specified by the employer have been complied with

Contractors seeking to “back to back” the design risk to the professional consultant that has carried out the design

Contractors seeking broader collateral warranties from the owner’s professional consultant that has carried out the design and/or verified the design

A greater desire to have caps on liability and/or reduced limitation periods.

Ultimately, the Supreme Court has shown yet again that decision makers ought to seek to give effect to words and terms in contracts rather than ignore terms that may on first reading appear inconsistent. It has also shown that the questions of commercial purpose are not readily tractable and secondary to the written words.

As Oscar Wilde said, “success is a science; if you have the conditions, you get the result”. The real skill for the builder and the employer is to make sure that the right conditions are written into the contract.

Hamish Lal is a partner in the international arbitration practice at Akin Gump